Many Markets Many Opportunities

Should we trade just one or many markets?

The more able and ambitious the trader, the more markets he can trade to maximize his returns whilst minimizing risks.

Let’s get this out of the way – this is NOT a version of portfolio theory for maximizing returns through effective differentiation. Elegant as the mathematics may be, the Nobel laureate himself pointed out the model’s effectiveness was predicated on assumptions made about the performance of assets being admitted into the portfolio – ie. the objective mathematical mechanics are run on subjective persuasions.

No – trading multiple markets simply means picking and choosing opportunities with the best trends and trading the motivations behind the strongest moves.

As an example, an event may happen in the equities market that also influences the commodities and FX markets (such as a Chinese market meltdown). The world runs into a risk off scenario, and the severity of the equities market weighs on other markets. But due to the vagaries of the commodities and FX markets, their price movements are not as directly correlated to the unfortunate event. Though pervasive pessimism sweeps all the markets, their trends may be less predictable and vitriolic. The stress behind the equities market thus offers a more direct, stronger trend than for commodities and FX markets. Another example is the sustained oil price slump. Even when it was possible to trade the Aussie and Canadian dollars, it would have been more rewarding and less pressurizing to trade the fall in oil price directly, than weather interim whipsaws in the FX markets provoked by Yen, US and European currencies.

So is a choice of multiple markets naturally better for the trader? The caveat is the trader himself must know how to trade different markets well. He can achieve this through diligent appreciation of various markets’ characteristics or by employing various trading solutions. If the trader lacks such motivation or abilities, it is better for him to trade single or fewer markets. It will not be as efficient, but at least he can still be reasonably profitable. For someone who wants more bang for the buck, multiple markets and multiple timeframes is the way to go.